112 construction firms accused of bid rigging - but why should it be illegal to share bidding costs?
April 17th, 2008 by Giles112 construction firms have been accused of bid rigging by the OFT (Office of Fair Trading) in England. There are two main allegations. One is that they engaged in cover pricing - where one or more bidders collude with a competitor during a tender process to obtain a price or prices which are intended to be too high to win the contract. Cover pricing arrangements have previously been found by the OFT and the Competition Appeal Tribunal to be illegal and in breach of the Competition Act 1998 due to the restrictions on competition that arise.
In addition, a minority of the construction companies have been accused of entering into arrangements whereby it was agreed that the successful tenderer would pay an agreed sum of money to the unsuccessful tenderers (known as a ‘compensation payment’).
One problem for companies tendering for a project is the cost of bidding. Back in 1994 one of the recommendations in the Latham Report was that the Government should, on complex projects, pay some compensation to unsuccessful bidders but that has not been taken up.
So why not allow the bidders themselves to arrange compensation? It then becomes another part of the bidding cost: if three or four companies invited to tender agree that a fixed amount would be paid by whichever of them wins the contract to each of the unsuccessful bidders, there would arguably be more incentive for each of them to submit a bid. And the process could be made transparent with a copy of the bid compensation agreement submitted with the tenders.
Several years ago a client bidding for a large contract in the Gulf suggested this approach, simply as a way of mitigating the risks for the bidders, and wanted to know if it was illegal. The cautious legal opinion was that it could be seen as anti-competitive, and it would be more problematic if only some of the bidders signed up.
But if all the bidders are involved, and the client is aware of the arrangement, competition is not really affected and even those who lose get at least some compensation for their effort - like the horses in the annual Heinz 57 race at Leopardstown in Ireland where every horse gets a prize. (I know as I once had a share in the horse that came last!).
NOTES
Under the Competition Act 1998 and Article 81 of the EC Treaty, cartels are prohibited. Any business found to be a member of a cartel could be fined up to 10 per cent of its worldwide turnover. In calculating financial penalties, the OFT takes into account a number of factors including seriousness of the infringement(s), turnover in the relevant market and any mitigating and/or aggravating factors. The basis of the OFT’s considerations are set out in OFT’s guidance as to the appropriate amount of a penalty http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft423.pdf
Once the OFT have issued their Statement of Objections (SO) to the companies concerned, the parties then have the opportunity to make written and oral representations in response to the case set out by the OFT. Such representations will be considered by the OFT before any final decision is made.
April 21st, 200811:09 am at
All bidders could be paid by the client to bid. The amount should be enough to pay the bidder for all expenses to bid plus a sum to encourage bids. I dont think this is illegal, yet it would be transparent and cover pricing would be unnecessary.